Income Inequality

According to
research in several disciplines, the extreme disparities of wealth and power
that exist in our country are corroding our democratic system and public trust.
They are leading to a breakdown in civic cohesion and social solidarity, values
that have always been significant in American society, as well as in Christian teachings.

Recently, in
his exhortation "Joy of the Gospel" (2013), Pope Francis sharply
criticized growing income disparity, unfettered markets, and idolatry of money,
and he warned that these are leading to a new tyranny. While Catholic social
teaching has never required complete income equality, it has frequently made
clear that inequality should be evaluated in terms of certain moral principles:

Ability to meet the basic needs of people in
poverty

Ability to increase the level of participation by
all members of society in the economic life of the nation.

These norms
establish a strong presumption against extreme inequality of income and wealth
as long as there are poor, hungry and homeless people in our midst. They also
suggest that extreme inequalities are detrimental to the development of social
solidarity and community.

Solidarity
(which is what Catholic Social Teaching urges us to practice) is characterized
by people taking responsibility for one another and caring for each other. But
it is difficult for solidarity to exist when people do not know each other and
do not share institutions that transcend differences in class, culture and
ethnicity.

More than nine
million households in the U.S. live behind walls in gated communities, similar
to statistics in polarized communities such as Mexico and Brazil. It is startling
to note that more than one-third of new housing starts in the southern U.S.
alone are in gated communities). As a result there is more opportunity for
fear, distancing, misunderstanding, and uncaring individualistic behavior than
in solidarity.

As people become
more individualistic, we see some withdrawal of support from community
institutions that uphold the common good. As wealth concentrates in fewer
hands, some pursue narrower, more selfish interests and use their wealth to
lobby for policies that weaken community institutions and increase their own
wealth.

Effects
of Growing Income Disparity

Income
disparity has several ill effects on a society, among them an erosion of social
mobility and equal opportunity, the latter two being traits the U.S. has always
prided itself on. Research across the industrialized OECD countries has found
that Canada, Australia, Denmark, Norway, Sweden and Finland provide much more opportunity
for mobility than the U.S. The U.S. is now among the least mobile of industrialized countries in terms of earnings.

During times
of great inequality, there is also disinvestment in the public sector -- less
support for education, affordable housing, public health care and various
safety net programs. In 1964, a time of relative equality, there was greater
concern about poverty; in fact, the U.S. launched the War on Poverty then to
further reduce disadvantage. When services deteriorate and the wealthy no
longer participate, it leads to a decline in political support and resources,
which, in turn, leads to a cycle of further disinvestment.

Unfortunately,
what has been happening in our country over roughly the past 30 years bears a
strong resemblance to the era of the "robber barons" in the late 19th
century. In 1979, the top 1% of people in this country earned 8% of the
national income. In 2010, the wealthiest 1% of households owned 35.6% of all
private wealth. That is a tremendous change! There are many reasons for this
increase, but one of the foremost is that income from investments, largely held
by those in the top 1%, has been higher, whereas income from work and wages has
stayed flat.

Sasha
Abramsky, in his 2013 study, “The American Way of Poverty: How the Other Half
Still Lives,” observes that we struggle to find the language to talk about
inequality because the depth of American poverty must be seen not only as a
problem in its own right, but also as a sign that something is dreadfully wrong
with our democracy itself. One of
Justice Louis Brandeis’s famous sayings comes to mind: “If democracy becomes
plutocracy, those who are not rich are effectively disenfranchised.”

As if things
weren’t bad enough, Tyler Cowen, in his 2013 study, “Average Is Over: Powering
America Beyond the Age of the Great Stagnation,” predicts a greater split in
income in the future due to the rise of mechanized intelligence (an ever-faster
internet, artificial intelligence and computer programs that can quickly
perform vast data calculations), which means that the economy will be passing
along most of the higher rewards to a relatively small cognitive elite who have
mastered these machines. High-income earners of tomorrow will be those who
complement the speed and power of machines.

Who Are
the Wealthy?

People often
wonder exactly how much income and/or wealth someone needs to have to be
included in the top 1% in the U.S. Edward Wolff of the Levy Economics Institute
of Bard College has spent several years researching the issue of inequality in
this country and responds to this question by noting that the mean
household income of the top 1% is $1,318,200 and their mean household
financial wealth (non-home) is $15,171,600 (median income is not
given). His analysis continues -- the
top 1% of households, as of 2010, owned 35.6% of U.S. wealth, and the next 19%
(the managerial, professional and small business stratum) had 53.5%, which
means that just 20% of the people owned over 89%, leaving only 11% of the
wealth for the bottom 80% (wage and salary workers). In terms of financial
wealth, the top 1% of households has 35% of all privately held stock, 64.4% of
financial securities, and 62.4% of business equity.

The IRS has
reported that 95% of income gains reported to them since 2009 have gone to the
top 1% of filers. However, these figures underestimate the amount of inequality
because the IRS data include only what is reported to them (e.g. social
security, salaries/wages, pensions, dividends and capital gains from the sale
of stocks and other assets). They do not include other sources of income (e.g.
income kept in tax shelters). Income disparity data like this have led the
Federal Board of Governors’ member Sarah Bloom Raskinto to say in May 2013: “The
large and increasing amount of inequality in income and wealth, which has been
an ongoing phenomenon for decades may have exacerbated the [recent economic]
crisis and I think more research is required to determine whether it may also
pose a significant headwind to the recovery from the crisis for years to come.”

A recent
study by Citizens for Tax Justice examined whether our present tax code,
including all federal, state and local taxes, was as progressive as many people
think. Their analysis shows that it is indeed progressive for the bottom 80% of
tax filers, but progressivity slows down quite dramatically for the top 20%, so
that the top 1% -- those who take in $1.3 million per year on average -- pay an
effective rate of only 30.8%, scarcely more than those in the 80th
percentile.

Between 2001
and 2010, the U.S. borrowed almost $1 trillion to give tax breaks to the top 1%
of the wealthiest citizens of our country. These tax breaks reduced the top
income tax rate, cut capital gains and dividend taxes, and eliminated the
estate tax, our nation's only levy on inherited wealth, all of which benefitted
a very small segment of U.S. population.

A recent study by the Institute of Policy Studies (as well as
Robert Reich's film "Inequality for All") makes clear that many of
those who are exceptionally wealthy are the heads of corporations. The ratio of
CEO compensation to average US worker pay was 325 to 1 in 2011 and 350 to 1 in
2012, up from 42 to 1 in 1980. Interestingly, the Securities and Exchange
Commission (SEC) in September 2013 has established a rule as part of the
Dodd-Frank bill that will require corporations to report the CEO-average worker
ratio each year beginning in 2015.

Effects of Income
Inequality

The lobbying agenda of many corporations includes corporate
deregulation, weakening of environmental laws, special tax treatment and
loopholes, weakening of worker health and safety rules, and blocking expansion
of public health and food safety oversight.

A 2011 study by Citizens for Tax Justice found that 280 of
the most profitable corporations had dodged taxes on half of their profits over
the previous three years. Thirty of the companies paid no taxes and received
substantial subsidies between 2008 and 2010, despite combined pre-tax profits
of $160 billion, and 78 paid no federal corporate income tax during at least
one of the three years. The average effective rate for all 280 companies
between 2008 and 2010 was 18.5%, far less than the statutory corporate income
tax rate of 35%. "These 280 corporations received a total of nearly $223
billion in tax subsidies," observed Robert McIntyre, Director at Citizens
for Tax Justice and lead author of the report. "This is wasted money that
could have gone to protect Medicare, create jobs and cut the deficit."

Income disparity slows the economic recovery of everyone, according
to a January 2014 study by Barry Cynamon and Steven Fazzari, economists with
the Weidenbaum Center on the Economy, Government and Public Policy at
Washington University in St. Louis. The study says that stagnant income for the
bottom 95% of wage earners makes it impossible for them to consume as they did
in the years before the downturn. By examining the connection between consumer
debt, household spending and rising inequality, the study shows that the
debt-to-income ratio rose nearly 12 times as much for those at the bottom as
for those at the top between 1980 and 2007. But that borrowing spree ended with
the recession and these tapped- out consumers (who represent more than half of
the nation’s overall economic activity) have little or no savings to sustain
their lifestyles, leaving them with next-to-nothing to draw on or to borrow. That
fact is a major problem for the larger economy.

Another study (“The Equality of Opportunity Project”), released
in January 2014, led by Harvard’s Ray Chetty, states that one thing has stayed
constant: people who are poor today have the same odds of staying poor in
adulthood as their grandparents did. Advances in opportunity provided by
expanded social programs have been offset by other changes. Increased trade and
advanced technology, for example, have closed off traditional sources of
middle-income jobs. Thus, a person’s parents and how much they earn are more
consequential for young people today than ever before. Mobility is stuck at a
low rate, at least compared with other wealthy nations, such as Canada, Denmark
or Sweden. These findings are likely to set off a new round of debate over
mobility and inequality or, alternatively, focus attention on other issues,
such as problems with the tax code.

Appearing on Moyers and Company on January 6, 2014, Thomas
Volscho, a sociologist at the City University of New York and author of a study
published in the “Journal of Politics,” explained how congressional
gridlock operates to benefit the wealthy. The findings suggest that Congress,
especially the Senate, has a strong bias toward maintaining the status quo, and
when there’s already a lot of inequality, a self-reinforcing pattern emerges. Since
the very design of the Senate makes it hard to get things done, Congress’s
inability to pass legislation that could change the situation gets worse. So
the rich become richer at the expense of everyone else. This study is part of a
growing body of research into how politics and inequality are intertwined.

Large
campaign contributions to powerful politicians, giving them special access

Owning
a disproportionately large share of media outlets and the ability to influence
the media through public relations and communications firms

Being
part of Wall Street-funded pro-free-market think tanks, research organizations,
advocacy groups and associations such as the U.S. Chamber of Commerce and the
Business Roundtable, which have armies of lobbyists who support their positions

Low
taxes on income from wealth (capital gains taxes were 39% in 1979 and 15% in
2012)

Free
trade and other policies that have: boosted stock prices; enabled companies to
divert jobs to countries with low wages, few worker protections and weak
environmental standards; and allowed companies to pay low wages to their U.S.
workers

Unlimited
inheritances (estate taxes were eliminated in 2010; returned in 2011 at a
diminished rate only on wealth inherited over $5 million)

Tax
subsidies for corporations and on various luxuries of the wealthy, such as
corporate jets (from 99 to 1, Chuck Collins, 2012)

The admonition in the encyclical “Populorum progression” makes it clear that “no one is
justified in keeping for his exclusive use what he does not need, when others
lack necessities. It is unacceptable that citizens with abundant incomes from
the resources and activities of their country should transfer a considerable
part of their income abroad purely for their own advantage, without care for
the manifest wrong they inflict on their country by doing this.” And Americans'
innate sense of fair play reinforces the concept.

“Faithful Budget, 2014” speaks eloquently to the issues
raised in the preceding sections: "...our nation has allowed too much
injustice and greed to govern our current economic structures. Instead, we seek
to increase equity and equality in this nation. We are alarmed at the growing
economic divergence between rich and poor, creating permanent inequalities that
are neither just nor socially sustainable. Over the past thirty years, tax
policy has been used to perpetuate rather than address these inequalities"
(p. 23).

There are numerous reforms that would begin to address the growth
in income disparity over the last 30 years, from paying workers a "living
wage" (a reform that is gathering momentum in many American cities and
counties) to reducing the influence of money in politics, to reining in CEO
compensation. But one of the highest priorities is to redesign our current tax
system to ensure a more progressive tax code, where all members of the
community carry their fair share of the responsibility, not only to meet the
immediate needs of the economically marginalized but also to simultaneously
reduce our nation's deficits. We are concerned with the common good, right
relationships among all people, a just working of the economy. and a balanced
approach to deficit reduction.

"Within a country that belongs to each one, all should
be equal before the law, find equal admittance to economic, cultural, civic and
social life and benefit from a fair sharing of the nation's riches."
Octogesima adveniens